You know it’s coming. Ever since the UK government opened the spending taps to keep the British economy ticking over during the COVID pandemic, investors and tax advisers have between them been wondering how this will be paid for and who will be facing the prospect of higher taxes when the bill comes due.
At the moment the priority is beating the disease, and supporting UK employers so that businesses are still around next year. For investors, though, there are some important questions to be answered. One of those involves portfolios that will be facing the prospect of higher levels of capital gains tax in 2021 and beyond.
UK Chancellor Rishi Sunak announced yesterday that CGT rules were under review, with scope to bring them more into line with higher rates of UK income tax (40% in England). Of special interest to The Armchair Trader was the proposal that share investors could be faced with much higher CGT tax bills in very short order.
As a discretionary tax which is generally only payable on a disposal, CGT has long been a sensible reason to hold on to those “cherished” holdings – often over-sized – which can make managing a portfolio that bit harder, especially when trying to manage risk and investment objectives within a diversified portfolio.
“Whilst we can often advise clients of the merits of top-slicing such holdings, some have been reluctant to crystallise what is otherwise an avoidable liability to tax,” says Simon Temple-Pederson, head of the Bristol office at JM Finn. “With the Chancellor instructing the menacingly named Office of Tax Simplification to undertake a review of current CGT rules, in the current environment, it suggests a likelihood of them rising from what are surely attractive rates to something more aligned with income tax.”
Temple-Pederson says now might be the time for the head to take over from the heart and take a strategic look at those holdings that may well have been in the family for a long time, but may be impinging on the balance of a long term portfolio.
The first step when managing your CGT exposure to make full use of your ISA allowance. This provides UK residents with a £20,000 annual tax free allocation to eligible investments. Most leading brokers, and many smaller ones, offer ISA wrappers to traders. For most people, £20,000 is likely to suffice.
If you fall into the category where your invested assets are looking more likely to be hit by CGT hikes, you could move some of your activity into financial spread betting, which is still tax free in the UK and Republic of Ireland. Financial spread betting accounts provide access to a very broad range of markets. New restrictions on leverage used for traders in the EU and UK mean that spread betting is not as risky as it once was, but is only an option if you are comfortable trading with leverage.
Another area worth looking at is the battery of tax free investments that are still available in the UK. Many of these are associated with sustainable projects which are good for the environment. For example, demand for investment in forests in the UK is picking up sharply. TIME Investments has been working with investors to develop a sophisticated portfolio of forestry assets like Barracks Forest in Scotland.
“Forestry assets are becoming increasingly popular with investors because they provide access to a sustainable investment, but also one that we believe offers low volatility and stable returns,” says Stephen Daniels, Head of Investments at TIME. “Our research shows that 58% of retail investors said they need to think more about the future of the planet for their children – forestry helps them tick this box.”
Other investments which sit outside the CGT net include cask whisky, which we have written about previously on The Armchair Trader. Whisky in bonded warehouses can form part of a portfolio for several years before being sold to a bottler for a considerable yield.
Whatever your poison, the fact remains, investors in the UK have been warned that tax hikes are coming. It may be prudent to start exploring options now, before the spring budget arrives.